Où est le cadre bipartisan pour les infrastructures ?
- Joe Biden’s bi-partisan compromise last week on the infrastructure package (BIF) was welcome by the market but it’s still a winding road through Congress. At the same time, Biden continues to hold fast on his social programmes.
- Investment and employment in the Euro area are holding up much better than feared, pointing to smaller damage to potential growth than during the Great Financial Crisis (GFC). This resilience has a corollary: accumulated debt. “Productive scarring” may be limited, but “financial scarring” is a key issue, including for the European Central Bank (ECB).
Joe Biden is lending his support to the USD579bn “Bi-partisan Infrastructure Framework” (BIF). This compromise has been broadly welcome by the market last week, as it would point to a “goldilocks” scenario: some decent support to much needed infrastructure spending, with less risk of overheating given its much reduced size relative to Biden’s initial plans and hence less pressure on the Fed. The politics of getting the BIF through Congress remain very complex though, and its fate is dependent on progress on the USD1,800bn American Families Plan on which Biden refuses to compromise at this stage. We find it interesting that Biden’s choice to focus on redistribution rather than investment would actually vindicate Larry Summers’ doubts on “Bidenomics” capacity to fight secular stagnation properly.
Meanwhile, the dataflow continues to improve in the Euro area and so does the “general mood” in the economic profession on the scars left on the economy by the pandemic. The Great Financial Crisis was a matter of “crash deleveraging” of the private sector, grudgingly offset by public finances and imperfect support from the ECB. The impact on potential growth was significant. Conversely, the pandemic crisis has taken the form of a rapid “twin leveraging”, with both corporates and governments raising debt to plug the “lost output”. This approach has so far provided a high level of protection to the Euro area’s productive capacity. Investment and employment have held up much better than in the aftermaths of the GFC, limiting the damage to potential GDP.
We think the issue of accumulated debt should loom large in the ECB’s strategy review. The Governing Council will get into the final conclusions of its discussions while the economy is doing better and with in all likelihood most national governments maintaining a very accommodative fiscal stance into 2022. With a growth potential surprisingly resilient – when compared with “peak anxiety” on these matters in the autumn of last year - the hawks may get more vocal. We expect the doves to insist that the resilience of employment and investment came with a cost in terms of financial health. This cost needs to be “internalized” by the central bank, and this would argue with proceeding very cautiously on policy normalization. “Productive scarring” may be more limited than feared, but its counterpart, “financial scarring”, deserves attention.
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